Chrysler's debt, labor could derail Fiat deal, bailout funds
DETROIT -- With the clock ticking to sign a merger deal with Italian automaker Fiat, Chrysler is struggling to shed a majority of its debt by getting the holders to take shares in trade.
It's a stumbling block that could delay or derail the proposed partnership, which the government has ordered completed by May 1. If Chrysler can't meet that deadline, the government has said, it will get no more bailout money. That likely would push it into filing Chapter 11.
Standard & Poor's last week cut its ratings on Chrysler and said it doesn't believe it would survive bankruptcy.
"We believe that if the company filed for Chapter 11 bankruptcy protection, many of its assets and operations would be sold in discrete transactions over time, while other segments may be closed," said Standard & Poor's recovery analyst Greg Maddock.
Adding another obstacle, Fiat CEO Sergio Marchionne said in an interview published Wednesday that Fiat will walk away from a deal if the U.S. automaker's unions don't agree to major cost cuts.
Chrysler has asked for $9 billion in loans to help weather the collapse of car sales that started in the fall. It has received $4 billion and is getting enough working capital to make it through April. President Obama said last month that he doesn't believe Chrysler can become viable as a stand-alone company. He gave it 30 days to find a partner, saying only then would it be eligible for $6 billion in additional loans to make a deal work.
Chrysler's situation differs from General Motors' gm. GM also has massive debt, but much of it is unsecured. Chrysler is saddled with a huge, for its size, load of $6.8 billion in first-lien-secured debt alone. Those debt holders have more leverage to hold out for a better debt-restructuring deal. They know that in a bankruptcy, they have first dibs on any money, even if it means selling off Chrysler in pieces.
The debt holders have been meeting with the president's automotive task force in the past few days, attempting to hammer out a deal.
Rep. Gary Peters, D-Mich., has urged big banks holding much of the debt to do something quickly. Many of them, including JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley, also have taken bailouts from the government and, he says, should be doing more to help save Chrysler.
"These banks hold the key to Chrysler's survival," he said recently. "The banks that hold Chrysler's debt were provided federal support for the good of the economy, and they should negotiate in good faith with automakers for the same reason."
In the interview published in the Toronto Globe and Mail, Marchionne said: "Absolutely we are prepared to walk. There is no doubt in my mind. We cannot commit to this organization unless we see light at the end of the tunnel."
A Fiat spokesman confirmed Marchionne's statements.
Marchionne said there is a 50% chance the deal will fail because of lack of progress in labor negotiations in both the United States and Canada.
"The dialogue is out of sync," Marchionne said. "I think they need to see what state the industry is in. Canada and the U.S. are coming in as the lender of last resort. .... No one else would put a dollar in. This is the worst condemnation of the viability of this business.